General Question

BoyWonder's avatar

If I were to take a total distribution from a pension plan and roll it into a Roth IRA, will that distribution be taxable?

Asked by BoyWonder (806 points ) February 6th, 2012

I’m asking this question for someone…hoping to learn something here…I don’t even know if I’m asking this correctly…

Observing members: 0 Composing members: 0

11 Answers

Imadethisupwithnoforethought's avatar

Short answer is yes.

You will add it to your income for that year, then add a 10% penalty on top of your effective tax rate for that specific portion of money. If you have a lot of years before retirement, it is worth it.

Jeruba's avatar

@Imadethisupwithnoforethought, it is worth it because—?

Imadethisupwithnoforethought's avatar

@Jeruba

A normal IRA is tax deffer-ed. You pay taxes at the end.A Roth IRA is considered already taxed; you give up the deferment in the present, betting you have enough growth potential on the investment that paying taxes now will be a much better investment.

Young people have real income now, not just investment income. Older folks only have the income that they withdraw. So in general, the more years you have until retirement, the more worthwhile it is to convert investments to Roth status and pay any penalty.

If the investment grows tremendously under Roth status, you do not have to pay taxes on the gain.

DrBill's avatar

It is not taxable at the time, as long as: the withdraw and the deposit happen in the same tax year, AND it is less than 60 days from the withdraw and the deposit. You will be taxed once you start drawing the money out for use.

Imadethisupwithnoforethought's avatar

@DrBill I am concerned we are giving contradictory advice.

As far as I know, you are correct if the person is going traditional IRA, but if they are going to a Roth, they have to pay the tax penalty on the principle re-characterized. What are you seeing that I may have overlooked?

bkcunningham's avatar

How old is your friend? What is their filing status and AGI? Is the pension plan currently in a 401-K? If part of the pension is an appreciated employer stock plan, it is a different story though. If you have a direct rollover or a trustee to trustee rollover from your 401-K to the Roth IRA, you will not be penalized to 20 percent tax or the 10 percent early withdraw.

I agree with @DrBill on this one.

JilltheTooth's avatar

This is one site for asking Qs of an accountant, and this is another. These are just from a quickie Google search. Not to argue with what our Jellies are saying, here, but they seem to be giving conflicting advice. I know nothing about the subject, and like I said, I just pulled those two sites off of Google, they may be worthless, I hope not. Good luck!

BoyWonder's avatar

My friend called the IRS. Apparently, They said the same thing @Imadethisupwithnoforethought said. Thanks dude!

bkcunningham's avatar

@Imadethisupwithnoforethought, will you do my income tax returns for me? Please.

DrBill's avatar

@Imadethisupwithnoforethought
The funds can be rolled without being taxed.

Assuming (nasty word), you have put $10K in your ROTH and $10K in a regular IRA and combine them in a single ROTH, the 10K from the regular IRA will be taxed as it is drawn out, the 10K from the ROTH will be tax free on withdrawal. Additionally the interest earned will be taxed on withdraw.

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